Lessons from the Pros


It is Time to do the Shake

For this week’s offering, I wanted to share with you a slice of real-life trading action taken directly from the Crown Jewel of Online Trading Academy’s Educational Program. As well as teaching students in the Live classroom environment and the ongoing Live Trading rooms known as the Extended Learning Track, or XLT, I also have the exceptionally distinct pleasure of being involved in the Mastermind Community within Online Trading Academy. The Mastermind Community was setup just over 2 years ago, as a place for our most elite students to interact, share trading ideas and develop their speculative skills to the highest level. It is exactly what it says on the tin, a community where like-minded individuals meet together to achieve their goals in the markets.

Some months ago, I was invited to participate in the Mastermind Trade Rooms, a part of the community where students and instructors alike collaborate on their analysis and trade plans. These more informal sessions are a unique environment where personally I get to work with students on an equal level, creating quite a different dynamic to the regular instructor and student relationship. Every two weeks I host what I now call “The Trader’s Gym Session,” where we attempt to hone our skills and encourage one another to be the best we can be. Last week’s session was a particularly good one, as a trade I had been personally waiting for, came to its entry point thus giving us a great opportunity to discuss the setup in more detail and the thought process behind it. The reason why I feel this is a good example to highlight, is because it clearly demonstrates the common pitfalls of FX trading, and how a trader needs to be disciplined enough to follow their trade plan so as to make sure that they avoid the regular mistakes that most people fall prey to.

Firstly, let’s take a look at the chart and the setup itself that occurred during the live trade room:

live trade room chart

The trade in question as you can see, was on one of my favorite currency pairs, the GBPCHF. One of the reasons why I like this particular currency is because of its sheer volatility. When this market gets moving it really does cover some ground, which is especially ideal if you’re looking for those bigger moves, which do happen on a weekly basis if you look at the right pairs. Just remember though, volatility can really punish the novice trader if they don’t understand what a truly low risk and high reward trade setup looks like. I would advise any new start-up trader to only start trading bigger moving pairs when they have a solid trade plan and more experience on their side.

As you can see from the above snapshot, the GBPCHF had rallied impressively to a previously recognised area of supply, as marked on our chart. Having already recognised the major imbalance between the willing buyers and the willing sellers which caused the initial drop from the zone, the group and I recognised that this was a low risk and high probability shorting opportunity, which also offered an attractive reward at the price just below 1.4800. It was time to take the trade. Let’s see how things progressed:

snapshot of GBPCHF

Over a short period of time, prices dropped nicely from our level, producing just over 1:1, also suggesting that this would be a safe time to move stop loss orders to breakeven, taking the risk out of the trade. This is a common practice amongst traders of all styles and varieties, however in my personal experience it is not something that I like to do in my own trading. The reason for this reluctance is due to the fact that if the level is a good one, there can often be the risk of what I call the “shakeout.” A shakeout is where price returns to the original entry area for a second attempt at entry. If you think about this logically, it makes perfect sense because if the level is a good one, the largest funds and institutions will do everything in their power to push the price back to the original ideal entry, because this offers the greatest reward potential and of course the lowest risk. This shakeout often results in many traders being taken out on their original trades, only then having to watch the price go in the direction, which they originally thought it would. Here is an example of what I’m talking about:

example of the shakeout

As we can see above, this is a perfect example of the shakeout we’re talking about. Price returns aggressively back to the original supply area and goes a tiny amount higher and then proceeds to drop. Ironically, before taking this trade, I explained to the students in the mastermind room, that I don’t like to move my stop to break even aggressively because I’m conscious of the shakeouts that can happen and would rather give the trade room to breath and hopefully hit the target. In my own currency trading I pretty much live by the saying, “A watched pot never boils.” By leaving the trade alone I have often found good things happen as we can see in the example below:

returns aggressively back to the original supply area

Just over 150 pips later, the final profit target was hit just below 1.4800 giving us a solid setup and a great risk to reward profile as well. However, just think about how differently things would have turned out if we would have moved our stop loss orders too quickly after the first initial drop from the supply zone? We would have ended up with a breakeven trade and little else. So why do people move the stops so quickly then and run the risk of being shaken out? Purely because they often see the risk as more important than the reward. I would advise you to simply accept the risk on the trade and allow the reward to come, as long as it was a valid setup in the first place of course. If you now your risk and you know your reward then let the market do its thing…you may be pleasantly surprised.

Have a great week ahead,

Sam Evans

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.